Pricing Research Review

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Pricing Research

Pricing research can be tricky. David Lyon, principal at Aurora Market Modeling did a great review of past and current price research methods in his tutorial “Research for Solid Price Decisions” at the 2010 Sawtooth Software Conference in Newport Beach, CA.

 

The recurring theme across his presentation was the need to take into account respondent psychology and infuse realism in how we ask pricing questions in order to get unbiased results. The price research methods reviewed include:

 

DIRECT QUESTIONNING

 

  • Willingness-To-Pay Questions: These can get you a ballpark price for radically new products when the price range is unknown. Given their inherent bias, since these questions clearly focus on price and invite respondents to “lowball” and bargain, they should be used only for exploration and followed-up with other price research  techniques.
  • Buy-Response in Monadic Designs: This approach can work if done right, which means asking about purchase intent in the context of a product description without calling respondent’s attention to the price and thus avoiding the bias found in willingness-to-pay questions. However, in order to measure price sensitivity we need at least two different monadic cells where different price points are asked. This is a simple and unbiased approach, but its precision depends on sample size for each cell, which may be a problem for tight budgets since large samples are recommended and many cells/price points may need to be tested.
  • Sequential Proto-Monadic: This approach which tests several price points in a sequential way within the same respondent doesn’t allow to disguise the focus on price and usually results in over-estimation of price sensitivity. David’s advice: Don’t bother using it.
  • Van Westendorp Price Sensitivity Meter: With this approach, we look for a “normal” and “acceptable” price ranges between price points considered too cheap or too expensive based on the idea that price acts a proxy for quality. A big issue with PSM is that respondents tend to be inconsistent in how they answer the 4 questions included in the approach: At what price it is too cheap? At what price it is a good value? At what price it is getting expensive? At what price is too expensive? This method can be used for early exploration on small samples, but results should be taken with skepticism as we can expect “lowballing.”  The other problem with this approach is that it doesn’t measure purchase intent. However, even the improvement suggested by Newton-Miller-Smith in 1993 by adding purchase intent questions after the “good value” and the “getting expensive” questions, has the problem that we really don’t know the actual purchase probability unless we have market data to calibrate the results.

 

TRADE-OFF METHODS

 

  • Rating-Base Full Profile Conjoint: This method, where a full profile is presented with variations across all attributes, was widely used a few years back. The major problem with this approach is that it tends to understate price sensitivity.  A hypothesis as to why, is that price is taken as an indicator of overall quality resulting in “reversed” price utilities (preference increases with price) or flattened utilities (not much change as price increase) for many respondents. David believes this is due to lack of realism in the task, particularly when hypothetical products are presented, and respondents don’t have anything knowledge or experience to based their choice on, so they use price to evaluate quality (if it is expensive it must be good
  • Discrete Choice Modeling or Choice-Based Conjoint (CBC):  This includes different types of designs:
  • Price-only Choice Models: In this method, respondents have to make a choice among the brand/price options shown, which a natural and easier task for respondents. Here, price is treated as a separate attribute for each brand.  It is a good general-purpose approach when concrete, realistic products are tested, although it doesn’t allow simulating the effects of adding or deleting products included in the original set (they are fixed and only prices vary).
  • Choices between hypothetical products: These are described by combinations of price and non-price attributes and levels. In order to be efficient, we need to focus on things respondents care about and model them accordingly. In order to get good results, we need to avoid impossible and illogical scenarios.

 

In the end, the key is to take into account respondent psychology in price research. As David says “give them realistic, natural questions and you’ll get less-biased answers.”

 

Comments Comments

Steven Forth Posted: June 25, 2012

It is great to see you sharing this research and providing advice. Will you also be covering value-based pricing? This is the approach Tom Nagle advocates in The Strategy and Tactics of Pricing. Another recent book covering this is Value-Based Pricing: Drive Sales and Boost Your Bottom Lin by Creating, Communicating and Capturing Value by Harry Macdivitt and Mike Wilkinson.

Michaela Mora Posted: June 25, 2012

Steven,
Thanks for your comment and reading recommendation. Value pricing is an interesting subject, but it is often an internal exercise companies do without necessarily having input from the customer the product is intended to. This review is about research methods trying to identify at what price point a customer is willing to buy a product or service. Conjoint analysis is a good approach to test value pricing from the buyer’s perspective. The actual value (estimated in dollars and cents against the reference value from a competing alternative) and perceived value are not always the same in the buyers’ mind, so we use primary research to find what the optimal price point is within the range a value pricing exercise might provide.
Michaela

Jon Manning Posted: June 26, 2012

Michaela,

I have created a brand new approach to pricing research: at PricingProphets.com, companies can ask a panel of global pricing experts and thought-leaders (already registered on the site) what price they should charge for a product or service, and why. We are the worlds only “crowdsourcing” website devoted to the forgotten P of Marketing.

I find your comment on value-based pricing being an internal exercise companies do without input from the customer interesting. We completed a project for a client on PricingProphets this week, and as a result of our experts advice, they are building a value-based pricing model that they share with clients who can input their own variables, volumes, etc. They will not be the first company that does this.

Regards,

Jon Manning
Founder & Managing Director, PricingProphets.com

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